José Prado
Holland & Knight
View from the Top

Security, Profitability, Bankability in the Spotlight

Wed, 02/22/2017 - 09:42

Q: What has been the major contribution of Holland & Knight to the future of the Mexican energy industry?

A: The Reform’s transformation process has been rough but is moving forward. Many events have taken place in the last two to three years and most of the regulations set by the governmental entities are finally coming into effect. A new reality and structure has been created for business in the energy industry, including areas where private companies were not allowed before. Holland & Knight has been working closely with the authorities and its clients, helping to close the gap between the industry’s expectations and the reality of the new market. We have maintained close communication with CRE, CENACE, ASEA and CENAGAS depending on our clients’ businesses, exchanging information with the regulatory entities about the expectations and experiences the private sector has had with the current regulations. We consider this crucial for the market’s development as regulations are among the most important factors that determine if private investors enter a new market or not. We are pleased to say the regulators have been open to listening to us.

Q: What are the main concerns for your clients?

A: The Mexican electricity market is a new scenario created from scratch in the past three years. Our client’s typical concerns are always related to three basic points: the operation’s security, profitability and the bankability of the projects. We have had some cases of companies with experience in other countries’ power auctions approaching us for help to participate in the Mexican version because its novelty has raised some regulatory concerns. We help them understand the local regulation and the basic guidelines they need to follow to structure competitive proposals for the auctions.

Q: What are the industry’s concerns regarding land acquisition and rights of way?

A: Some uncertainty still remains regarding the specific regulatory status that will apply in the case of land acquisition for energy projects. The law considers different regimes for oil and other hydrocarbons and electricity. CRE has just enacted specific criteria for certain types of projects that are subjected to the processes indicated in Chapter VIII of the Electricity Industry Law. Power generation projects such as hydropower or geothermal power plants can use these guidelines according to CRE’s criteria but solar parks and wind farms are not included. The level of uncertainty surrounding land acquisition processes is definitely a top concern in the industry as having right of way or land rights secured is crucial in the project financing stages, particularly in Mexico where several land regimes exist and it is a complex task.

Q: To what extent has the Energy Reform contributed to making business in the energy sector easier?

A: The business landscape in the energy industry has changed dramatically since the enactment of the Energy Reform and it has been a positive shift. In 2015, all PPAs seemed to be stuck, given the drop in CFE’s electricity tariffs. In 2016, however, electricity tariffs followed an upward trajectory, which has opened a new window of opportunity for private developers to sign PPAs with private off-takers. The power auctions are a great investment opportunity but we must not forget that we now have the elements of qualified user and supplier, which can establish contracts without CFE’s involvement. The new law permits private companies to register as suppliers and be competitive under the new regime.

 Q: Companies are not required to have all their permits in place to participate in the auctions. Should CFE be worried about project attrition?

A: Project developers are now rushing to secure land rights and meet all the regulatory requirements needed to have their projects ready to operate by 2019 or 2020, depending if they won the first or the second auction. The real issue, however, is whether these projects will sustain the low prices offered or not and still be profitable. But the fact that all the winning companies in the first auction signed a contract is a good signal.